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The Price of Better Designed Apartments

How much more are we willing to pay for a cross ventilated, well-lit apartment with a balcony and open views?

In March this year, apartment design standards will be implemented into the Victorian planning system. Apartment design standards will ensure all future apartments in Victoria are desirable, safe, healthy and sustainable. New developments in Victoria will only be permitted a planning permit if they meet these standards. A 2015 community survey found that the top concerns of apartment amenity were “access to daylight, functional space, and natural ventilation”, as well as noise and energy efficiency. (DELWP, 2)

Standards have been made for 16 elements of design: Building setback, functional layout, room depth, windows, storage, noise impacts, energy efficiency, solar access to communal open space, natural ventilation, private open space, communal open space, landscaping, accessibility, building entry and circulation, waste and recycling, integrated water and storm water management.

It is logical to think that better design standards should produce apartments of a higher quality. This in turn should increase the sale price of these apartments. Secret Agent was engaged to determine the price premium of better designed apartments. That is, how much more are consumers willing to pay for an A grade apartment compared to a B grade and C grade apartment?

In order to do this, four apartment factors which influence sale price were selected. These were sunlight, natural ventilation, open views and outdoor space. A sample of apartment sales in inner Melbourne was then collected. Each apartment in the sample was rated as an A, B or C grade apartment depending on how many factors they had present.

  • A grade apartments had all 4 factors.
  • B grade apartments had 2 or 3 factors present.
  • C grade apartments had 0 or 1 factor present.

Hedonic regression techniques were used to determine the price premium of A grade apartments over B grade and C grade. This was done for two different samples which distinguished between sales in large apartment buildings (Sample 1) and those in buildings with 5 levels or less (Sample 2). Sample 1 consisted of 886 sales and sample 2 consisted of 510 apartment sales. Factors such as date of sale, apartment size and location were all accounted for as part of the regression.

Table 1 shows the average price impact of an A grade and a C grade rating, relative to a B grade apartment in a building of over 5 levels. In other words, on average an A grade apartment is expected to sell for $50,837 more than a B grade apartment, while a C Grade apartment is expected to sell for $49980 less than a B grade apartment. This means that the average price difference between an apartment with a 4/4 rating and an apartment with a rating of 1/4 or lower is $100,817.

The results are similar for smaller buildings as shown in Table 2.

Compared to B Grade apartments, an apartment in the sample is expected to sell for $63,728 more if it is A grade, and $39,794 less if it is C grade. The difference between an apartment that has all four factors and one than has one factor or less is $103,522. In smaller buildings, the positive impact of an A grade rating was of greater magnitude than the negative impact of a C grade rating.

The results also showed that if an apartment is cross ventilated, has good natural light, has an outdoor area and open views, then it is likely to sell for 21.3% more if in a small building and 17.3% more if in a larger building.

This demonstrates that better design standards will have a significant impact on apartment prices once they come in to effect.



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